Introduction

The Allegation

An independent Kosovo would be economically isolated from
Serbia and would not have any chance of surviving economically, so it would
soon turn into a place of social riots and blood feuds among Albanians
themselves. (Serbia and Montenegro Foreign Minister Vuk Drasković
interviewed by Beta News Agency). [1]

That state could live only from smuggling drugs, people
and weapons. (President Boris Tadić in an interview to Radio Free
Europe/Radio Liberty).[2]

Doubts over the capacity of Kosova to survive economically
are often voiced in the most negative terms, building on the real difficulties
that the local post-socialist and post-war economy faces. The argument is that
Kosova would never be able to survive because of isolation and cultural
backwardness.

The Answer

I was in Kosovo the first time in December, 1968, when the
Serbs were still in charge, and back just after the Serbs had left and about
twenty times since then. When the Serbs were in charge, all of Kosovo was a
depressing trash heap. No one had washed a window in Pristina in years, garbage
and stray dogs were all over the place, I could not send a fax or get money
changed. The hotel had doors hanging off their hinges and stopped up toilets.
The food was vile, and the waiters surly. About the only activities that seemed
prosperous were the army and the police who stopped us at almost every traffic
intersection and rudely pointed automatic weapons at us and pawed through our
luggage. Within weeks after the war, the Kosovars had cleaned up Prishtina,
washed the windows, bought portable generators and set up shop. Everyone
welcomed visitors with smiles and enthusiasm. Small businesses had burst out
all over like flowers in spring.

Before the NATO intervention, Kosovo was well on the way to
ruin, corruption, and decay, a backwater of Socialist failure. After the Serbs
withdrew, underlying pride and entrepreneurial spirit began to build a market
economy, and have continued ever since then to strengthen it. There is a
long way to go, but it is clear that much is possible when ordinary people are
freed to build a country with cheerfulness and pride, rather than being
prisoners of sour, backward looking, defensive, isolation, which exalts racism
and ethnic hatred as a way to get ahead in politics--characteristics which were
hallmarks of the Milosevic regime in Kosovo.

Kosovo is a landlocked territory about half the size of Vermont. It has two million people, most of them ethnic Albanians. The scene of periodic
conflict between its Albanian majority and Ottoman and then Serb governments
for more than a century, it mounted a successful insurgency against Slobodan
Milosevic’s regime in the mid 1990s, spent seven years under international
civil administration and is widely expected to become an independent state in
late 2006 or 2007. It is well along the road to democratization and the
establishment of a rule of law, working hard to ensure security and equal
opportunities for its significant minority populations of Serbs, Roma, Bosniaks
and Turks. Economic progress has been mixed, with significant improvements in
infrastructure accompanied by high levels of unemployment and insufficient
foreign investment.

Opportunities for business, investment, and job-creation
abound. This essay develops the argument that Kosovo not only is viable economically,
but has a bright economic future if foreign investors recognize its potential
and if its future political leadership, encouraged by the international
community, pursues business-friendly policies and regional economic
integration.

Infrastructure

Kosovo’s infrastructure for business is acceptable, though
much remains to be done in the electric power sector to assure reliable
electricity supplies.

Kosovo’s Internet connectivity is among the best in the
world. It has a nationwide broadband wireless backbone, which allows businesses
and individuals to obtain high-speed Internet connections at prices at or below
those available in Western Europe and the United States. The connections are
reliable. Internet cafes abound in the cities, making it easy for individuals,
including those of modest means, to maintain regular access to email and Web
pages. High quality education and training on information technology is
available from IPKO Institute and the American University in Kosovo.

Most Kosovars rely on cellphones rather than landline
telephones. The fixed telephone system has been upgraded since the war and is
reliable. Cellphone service is available from competing providers at prices
competitive with those available elsewhere in Europe. The service provided by
the public PTK has been unrealiable in the past, although it is usually
possible to complete calls after several tries, even when congestion is a
problem.

The airport in Prishtina is modern and served by several
major airlines with daily flights to hubs throughout Europe and Turkey.

Major road construction projects sponsored by the European
Union have left Kosovo with a good highway backbone of mostly two-lane paved
roads. Rural roads are less satisfactory, many of them unpaved and poorly
maintained. Plans are well developed for a new high-capacity highway between
Prishtina and the Albanian port of Durres. The government of the Republic of Albania has agreed to invest substantial capital in the portion through the
mountains of Albania, and the United States Government has promised support.
The government of Kosovo needs to overcome EU objections and begin construction
on the portion through Kosovo, which also would relieve congestion on the Pristina-Prizren
road.

A well-organized and inexpensive system of intercity buses
allows the population without automobiles to move about freely all over Kosovo.
Kosovo has a basic railroad network, but it is poorly maintained and little
used for freight.

The biggest infrastructure problem is an unreliable
electricity supply. As noted elsewhere in this essay, Kosovo has the largest
lignite (soft coal) reserves in southern Europe, so it could be an exporter of
electricity. But dilapidated power generating facilities located near lignite
mines in the outskirts of Prishtina were not replaced as they should have been
after the war because of various bureaucratic impediments in funding for
rehabilitation from the European Union. Plans were developed by USAID for a
complete rebuilding of the electricity generating complex and associated coal
mines but have not been implemented. Plans also exist to tie Kosovo’s electric
grid in Albania, which would connect Kosovo to the European grid with
sufficient capacity to allow Kosovo to export electricity throughout Europe.

Until these plans are implemented, rolling power outages
even in the major cities will remain common. Most small businesses and many
larger facilities have standby generators to assure uninterrupted power
supplies.

Labor markets

Kosovo has an ample supply of labor, due to its rapidly
growing youth population. A significant fraction of those under 35 have spent
time in Europe or the United States, working, getting university degrees and
learning English. The primary and secondary school system in Kosovo does a good
job of inculcating basic skills. The public university is very weak and has so
far resisted efforts at dramatic reform. The gap is being filled by a large
collection of private institutions, the best of which is the American University in Kosovo, which enrolls about 100 new students annually in degree programs
in business administration and information technology. All instruction is in
English. No “brain drain” is evident. Most young Kosovars who have worked or
been educated abroad are eager to come home to participate in building a
prosperous, democratic independent Kosovo.

Young people are resourceful and enthusiastic, especially in
their contacts with Americans. Those who have work experience with
international organizations have a good work ethnic. Some others respond well
to good management that emphasizes the importance of meeting deadlines,
focusing on achieving results, and being on time for appointments.

Wage levels are higher than one might expect, given the
oversupply of labor, because international employers bid up wage levels. As the
international presence declines, wage levels should soften.

Entrepreneurship

One of the hallmarks of Kosovar society is the strong
orientation toward entrepreneurship. Largely excluded from the formal economic system
during 10-years of repression by the Milosevic regime, Kosovars learned to
survive by setting up business ventures with little capital and access to
infrastructure. Informal business networks exist throughout the region, into
northern Europe and North America. Almost every family is in some kind of
business, concentrating more on service and retail trade rather than
manufacturing and processing.

This pool of entrepreneurs offers significant opportunity to
those who have the capacity to tie entrepreneurship to sources of adequate
capital and modern business methods.

Capital markets

Kosovo has a good banking system. Internal savings rates are
high, and Kosovars proved more willing than many expected to deposit their
savings in the array of well-run banks established after the war. The major
banking enterprises are tied to banking concerns in Western Europe, and use
best practices in terms of internal auditing and conservative loan policies.

A significant source of capital in the past has been “remittances”
from Kosovars working abroad. For decades, it has been the custom for at least
one younger member of extended families to go abroad to find work and to send
money home. While much of this money is consumed meeting the daily needs of
family members still in Kosovo, it adds to the overall capital stock. Whether
the stream of remittances will remain as high in the future as in the past is
uncertain, as Kosovo attracts more of its young people to return and as host
countries tighten immigration policies.

Many wealthy individuals with family, social or
past-business ties to the Balkans have made significant investments in
medium-sized enterprises and building and highway construction. Multinational
corporations and individuals lacking any previous connection with Kosovo have
expressed interest, but have been more reticent, mostly because of uncertainty
about the legal status of Kosovo. Conclusion of final status negotiations
should remove these barriers.

Privatization of “socially owned” and “publicly owned”
enterprises has been controversial, but largely successful. The 14th
round of public bidding was launched on 16 March 2006. The privatization
agency, Kosovo Trust Agency, recovered well from a year-long hiatus in
2003-2004 due to maladministration by a senior European official who was sent
to supervise privatization. Recent rounds of bidding typically have offered
10-12 enterprises in each round, have attracted more than 100 bids in each
round, the highest of which typically totaled on the order of €12-15 million
per round. A special court has been set up to adjudicate claims arising from
privatization and the court is functioning.

Business services

Accounting and auditing services are available and
professional. A public agency sets accounting standards and licenses accounting
professionals. Legal services are improving as well-designed reform of bar
associations and lawyer licensing implemented after the war add more
better-educated and more professional lawyers to the practicing bar. There
still is an acute shortage of well-qualified business lawyers, however,
knowledgeable about the new legal framework and oriented toward market
transactions. The provides opportunities for U.S. and European law firms.

The Chamber of Commerce of Kosovo and the Kosovo-American
Chamber of Commerce both are under new leadership, which is western-educated,
and energetic in communicating with potential investors about opportunities in
Kosovo, providing services to businesses operating in Kosovo and in helping
business interests be well represented before governmental institutions.

Regional economic integration

Kosovo’s economic prospects are brighter if it continues on
its path of integrating its economy with others in the region. Already,
substantial financial and trade ties with Slovenia and Croatia augment capital and open up markets for products and services from Kosovo. The
large ethnic Albanian populations in the Republic of Albania, Macedonia, Serbia and Montenegro make available informal channels for investment and trade. These
will strengthen naturally. Present and past governments have had good
leadership in developing ties with European policymakers in charge of EU
enlargement and it is important that momentum in this direction continue.

Comparative advantage

Kosovo has some of the largest lignite (brown coal) reserves
in Europe. Lignite accounts for approximately 50% of total coal consumption in Europe, usually exported in the form of electricity rather than being shipped for long
distances. The primary opportunity for substantial capital investment that
would produce significant export revenue for Kosovo is in the energy sector,
given the need to build new mine and electric generating capacity to take
advantage of these reserves.

Kosovo still is a predominantly agricultural economy, with
most agricultural production taking place on small family-owned, or village-run
subsistence farms. Substantial reform in the methods of farming would be
necessary for Kosovo to become a significant exporter—or even to be
self-sufficient—in raw agricultural products. Agricultural processing, on the
other hand, is a significant investment opportunity. Already wine production,
soft-drink and beer processing and bottling, and dairy-product processing have
attracted significant foreign investment.

Tourism is a largely untapped opportunity for Kosovo. Its
geography is beautiful, varied, and largely unspoiled. A state-of-the art ski
resort operates in southern Kosovo. Hotels and restaurants in the cities are of
high quality. Those features, combined with Kosovo’s history and prominence in
the news, present the possibility for attracting a significant number of
foreign tourists. Investment in tourism is attractive because of large
job-creation potential, relatively low capital costs and the opportunity to
earn significant foreign exchange.

Kosovo’s good Internet infrastructure, the large number of
young professionals with good information-technology skills and the now widely
recognized potential of e-commerce to allow small enterprises access to world
markets represents another largely-untapped opportunity. Most Kosovar
businesses and non-profits of any size have web pages, but little has been done
so far to establish e-commerce and other forms of Internet intermediation and
software services in Kosovo.

Law

Kosovo has made good progress in establishing a rule of
law—in the economic sphere as well as in the political and human-rights
spheres. The main legal obstacle to economic development has been uncertainty
about Kosovo’s final status, and independence will resolve that.

Kosovo’s legal climate for business is sound. Laws for
business organization, corporate governance and investor protection, for
resolving business claims, and for bankruptcy reflect best practices in Europe
and the United States. The court system still is slow and unreliable, but
commercial arbitration is widely used as a substitute.

Macro-economic and tax policies are among the most
business-friendly in Europe, focused on minimizing the legal barriers to
starting businesses, simplifying and minimizing the tax burden and facilitating
free trade.

Going forward, the government of Kosovo must resist
pressures to erect trade barriers and to impede business formation through
non-transparent municipal licensing requirements, always desired by inefficient
local businesses which fear competition.

Conclusion

As Kosovo is allowed to break free of a century of
subjugation by foreign masters, it presents huge economic opportunities. The
right kinds of partnerships between business and government, and between outside
investors and managers and local entrepreneurs and workers can result in
significant job creation and significant rates of return on investment. With
the right leadership, Kosovo could become the Ireland of southern Europe.